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Where are markets headed ? Check out years 1994 and 2004 !

Markets have been really looking for direction - one week up, one week down. 3 weeks back, DOW had a great week with over 500 points gain, then it was down again and up again last week. After having this roller-coaster ride, DOW is back to where it was at start of 2010. So that begs the question - where is market really headed ?

Since I am history buff, I went back and checked recent history of DOW returns when economy was coming out of recession but not sure if recovery would be sustainable or not ?

Here are two years which I found similarities with 2010:

  • 1994: DOW start (3754) end (3834) Return: 2.13%
  • 2004: DOW start (10409) end (10783) Return: 3.5 % - this is after it had a major run in 2003
With this brief history lesson, most likely DOW would return about 5% in 2010 and end year between 10700 to 11000. However in next 5 months there would be significant volatility as markets inch towards year end and await for election results.

It's great to see closure on many key items such as:
  • Stress test results of European Banks - only about 7 out of 91 banks failed putting overall credibility of these tress tests at risk. For now, these banks and Europe seem to have come out of its "may"hem seen during May.
  • Goldman Sachs and SEC settlement - GS bought its license to print money by settling the case for $550 M
  • BP well stopped leaking oil - this reassured market that BP is not going BK
  • iPhone 4 antenna issues - not fixed bit Apple came up with good alternative of keeping its customers satisfied. Cost of $175 M is small compared to multi-billions Apple is going to make on iPhone 4
Overall Q2 results are coming out great - companies are in sweet spot. They are operating very lean but their top line is growing 20-40% compared to last years Q2 and almost of it is going into bottom-line. However in 2nd half, comparisons with last year would become difficult.

For this week's stock recommendation, check out A123 batteries (AONE) at around $9 for potential return of 50% in next 12-18 months. EV cars are just starting to roll off and almost everything from mobiles to cars are going to need lots of batteries. AONE is well positioned to participate in this growth and hence future looks good for this company.

Have a great weekend !

/Shyam

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